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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the Quarterly Period Ended March 31, 2022

 

 

 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the Transition Period From                  to

Commission File Number 001-37845

 

MICROSOFT CORPORATION

 

 

Washington

 

91-1144442

(STATE OF INCORPORATION)

 

(I.R.S. ID)

 

ONE MICROSOFT WAY, REDMOND, Washington 98052-6399

(425 ) 882-8080

www.microsoft.com/investor

 

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

 

 

 

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

 

 

 

 

 

Common stock, $0.00000625 par value per share

 

MSFT

 

Nasdaq

3.125% Notes due 2028

 

MSFT

 

Nasdaq

2.625% Notes due 2033

 

MSFT

 

Nasdaq

 

 

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

 

 

 

 

 

 

 

None

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  

 

Accelerated Filer 

Non-accelerated Filer 

 

Smaller Reporting Company 

 

 

Emerging Growth Company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of April 21, 2022

 

 

 

 

 

 

 

Common Stock, $0.00000625 par value per share

 

 

7,479,033,135 shares

 

 

 

 

 


 

 

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended March 31, 2022

INDEX

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

a)

Income Statements for the Three and Nine Months Ended March 31, 2022 and 2021

3

 

 

 

 

 

 

 

b)

Comprehensive Income Statements for the Three and Nine Months Ended March 31, 2022 and 2021

4

 

 

 

 

 

 

 

c)

Balance Sheets as of March 31, 2022 and June 30, 2021

5

 

 

 

 

 

 

 

d)

Cash Flows Statements for the Three and Nine Months Ended March 31, 2022 and 2021

6

 

 

 

 

 

 

 

e)

Stockholders’ Equity Statements for the Three and Nine Months Ended March 31, 2022 and 2021

7

 

 

 

 

 

 

 

f)

Notes to Financial Statements

8

 

 

 

 

 

 

 

g)

Report of Independent Registered Public Accounting Firm

32

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

 

 

 

 

 

 

Item 4.

Controls and Procedures

51

 

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

52

 

 

 

 

 

 

Item 1A.

Risk Factors

52

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66

 

 

 

 

 

 

Item 6.

Exhibits

67

 

 

 

 

 

SIGNATURE

68

 

 

 

2


PART I

Item 1

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME STATEMENTS

 

(In millions, except per share amounts) (Unaudited)

 

Three Months Ended
March 31,

 

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

17,366

 

 

$

16,873

 

 

$

54,776

 

 

$

52,136

 

Service and other

 

 

31,994

 

 

 

24,833

 

 

 

91,629

 

 

 

69,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

49,360

 

 

 

41,706

 

 

 

146,405

 

 

 

121,936

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

4,584

 

 

 

4,277

 

 

 

14,707

 

 

 

13,932

 

Service and other

 

 

11,031

 

 

 

8,768

 

 

 

31,514

 

 

 

24,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

 

 

15,615

 

 

 

13,045

 

 

 

46,221

 

 

 

38,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

33,745

 

 

 

28,661

 

 

 

100,184

 

 

 

83,695

 

Research and development

 

 

6,306

 

 

 

5,204

 

 

 

17,663

 

 

 

15,029

 

Sales and marketing

 

 

5,595

 

 

 

5,082

 

 

 

15,521

 

 

 

14,260

 

General and administrative

 

 

1,480

 

 

 

1,327

 

 

 

4,151

 

 

 

3,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

20,364

 

 

 

17,048

 

 

 

62,849

 

 

 

50,821

 

Other income (expense), net

 

 

(174

)

 

 

188

 

 

 

380

 

 

 

876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

20,190

 

 

 

17,236

 

 

 

63,229

 

 

 

51,697

 

Provision for income taxes

 

 

3,462

 

 

 

1,779

 

 

 

7,231

 

 

 

6,884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,728

 

 

$

15,457

 

 

$

55,998

 

 

$

44,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.23

 

 

$

2.05

 

 

$

7.46

 

 

$

5.93

 

Diluted

 

$

2.22

 

 

$

2.03

 

 

$

7.41

 

 

$

5.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,493

 

 

 

7,539

 

 

 

7,504

 

 

 

7,554

 

Diluted

 

 

7,534

 

 

 

7,597

 

 

 

7,552

 

 

 

7,617

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

3


PART I

Item 1

 

COMPREHENSIVE INCOME STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended
March 31,

 

 

 

Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,728

 

 

$

15,457

 

 

$

55,998

 

 

$

44,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives

 

 

6

 

 

 

18

 

 

 

8

 

 

 

30

 

Net change related to investments

 

 

(2,882

)

 

 

(1,705

)

 

 

(4,047

)

 

 

(2,398

)

Translation adjustments and other

 

 

(37

)

 

 

(218

)

 

 

(259

)

 

 

634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

(2,913

)

 

 

(1,905

)

 

 

(4,298

)

 

 

(1,734

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

13,815

 

 

$

13,552

 

 

$

51,700

 

 

$

43,079

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

4


PART I

Item 1

 

BALANCE SHEETS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

March 31,

2022

 

 

June 30,
2021

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,498

 

 

$

14,224

 

Short-term investments

 

 

92,195

 

 

 

116,110

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

 

104,693

 

 

 

130,334

 

Accounts receivable, net of allowance for doubtful accounts of $ 505 and $751

 

 

 

32,613

 

 

 

38,043

 

Inventories

 

 

3,296

 

 

 

2,636

 

Other current assets

 

 

13,320

 

 

 

13,393

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

153,922

 

 

 

184,406

 

Property and equipment, net of accumulated depreciation of $ 58,053 and $51,351

 

 

70,298

 

 

 

59,715

 

Operating lease right-of-use assets

 

 

12,916

 

 

 

11,088

 

Equity investments

 

 

6,907

 

 

 

5,984

 

Goodwill

 

 

67,371

 

 

 

49,711

 

Intangible assets, net

 

 

11,348

 

 

 

7,800

 

Other long-term assets

 

 

21,845

 

 

 

15,075

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

344,607

 

 

$

333,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

16,085

 

 

$

15,163

 

Current portion of long-term debt

 

 

1,749

 

 

 

8,072

 

Accrued compensation

 

 

9,067

 

 

 

10,057

 

Short-term income taxes

 

 

4,646

 

 

 

2,174

 

Short-term unearned revenue

 

 

34,027

 

 

 

41,525

 

Other current liabilities

 

 

11,865

 

 

 

11,666

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

77,439

 

 

 

88,657

 

Long-term debt

 

 

48,177

 

 

 

50,074

 

Long-term income taxes

 

 

26,483

 

 

 

27,190

 

Long-term unearned revenue

 

 

2,769

 

 

 

2,616

 

Deferred income taxes

 

 

304

 

 

 

198

 

Operating lease liabilities

 

 

11,357

 

 

 

9,629

 

Other long-term liabilities

 

 

15,154

 

 

 

13,427

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

181,683

 

 

 

191,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000 ; outstanding 7,483 and 7,519

 

 

85,767

 

 

 

83,111

 

Retained earnings

 

 

79,633

 

 

 

57,055

 

Accumulated other comprehensive income (loss)

 

 

(2,476

)

 

 

1,822

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

162,924

 

 

 

141,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

344,607

 

 

$

333,779

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

5


PART I

Item 1

 

 

CASH FLOWS STATEMENTS

 

(In millions) (Unaudited)

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,728

 

 

$

15,457

 

 

$

55,998

 

 

$

44,813

 

Adjustments to reconcile net income to net cash from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization, and other

 

 

3,773

 

 

 

2,936

 

 

 

10,481

 

 

 

8,342

 

Stock-based compensation expense

 

 

1,906

 

 

 

1,525

 

 

 

5,505

 

 

 

4,547

 

Net recognized losses (gains) on investments and derivatives

 

 

105

 

 

 

(351

)

 

 

(566

)

 

 

(833

)

Deferred income taxes

 

 

(198

)

 

 

(88

)

 

 

(5,985

)

 

 

(116

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

857

 

 

 

290

 

 

 

5,800

 

 

 

5,125

 

Inventories

 

 

(279

)

 

 

(329

)

 

 

(662

)

 

 

(349

)

Other current assets

 

 

91

 

 

 

478

 

 

 

1,861

 

 

 

1,154

 

Other long-term assets

 

 

(724

)

 

 

(885

)

 

 

(2,230

)

 

 

(2,446

)

Accounts payable

 

 

520

 

 

 

833

 

 

 

284

 

 

 

1,181

 

Unearned revenue

 

 

(209

)

 

 

(473

)

 

 

(7,437

)

 

 

(6,764

)

Income taxes

 

 

1,091

 

 

 

1,074

 

 

 

1,687

 

 

 

(2,277

)

Other current liabilities

 

 

1,287

 

 

 

1,590

 

 

 

(1,111

)

 

 

394

 

Other long-term liabilities

 

 

438

 

 

 

122

 

 

 

781

 

 

 

1,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

 

 

25,386

 

 

 

22,179

 

 

 

64,406

 

 

 

54,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash premium on debt exchange

 

 

0

 

 

 

(1,754

)

 

 

0

 

 

 

(1,754

)

Repayments of debt

 

 

(4,197

)

 

 

(500

)

 

 

(9,023

)

 

 

(3,750

)

Common stock issued

 

 

477

 

 

 

396

 

 

 

1,380

 

 

 

1,243

 

Common stock repurchased

 

 

(8,822

)

 

 

(6,930

)

 

 

(23,939

)

 

 

(20,208

)

Common stock cash dividends paid

 

 

(4,645

)

 

 

(4,221

)

 

 

(13,503

)

 

 

(12,307

)

Other, net

 

 

(158

)

 

 

(183

)

 

 

(522

)

 

 

(339

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in financing

 

 

(17,345

)

 

 

(13,192

)

 

 

(45,607

)

 

 

(37,115

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(5,340

)

 

 

(5,089

)

 

 

(17,015

)

 

 

(14,170

)

Acquisition of companies, net of cash acquired, and purchases of intangible and other assets

 

 

(18,719

)

 

 

(7,512

)

 

 

(20,775

)

 

 

(8,408

)

Purchases of investments

 

 

(8,723

)

 

 

(18,375

)

 

 

(21,537

)

 

 

(48,047

)

Maturities of investments

 

 

1,099

 

 

 

15,016

 

 

 

15,214

 

 

 

44,546

 

Sales of investments

 

 

16,693

 

 

 

5,876

 

 

 

25,218

 

 

 

10,711

 

Other, net

 

 

(1,181

)

 

 

400

 

 

 

(1,687

)

 

 

(1,356

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing

 

 

(16,171

)

 

 

(9,684

)

 

 

(20,582

)

 

 

(16,724

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

 

 

24

 

 

 

(33

)

 

 

57

 

 

 

(65

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(8,106

)

 

 

(730

)

 

 

(1,726

)

 

 

126

 

Cash and cash equivalents, beginning of period

 

 

20,604

 

 

 

14,432

 

 

 

14,224

 

 

 

13,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

12,498

 

 

$

13,702

 

 

$

12,498

 

 

$

13,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

6


PART I

Item 1

 

 

STOCKHOLDERS’ EQUITY STATEMENTS

 

(In millions, except per share amounts) (Unaudited)

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

84,528

 

 

$

81,896

 

 

$

83,111

 

 

$

80,552

 

Common stock issued

 

 

477

 

 

 

396

 

 

 

1,380

 

 

 

1,513

 

Common stock repurchased

 

 

(1,313

)

 

 

(1,528

)

 

 

(4,401

)

 

 

(4,322

)

Stock-based compensation expense

 

 

1,906

 

 

 

1,525

 

 

 

5,505

 

 

 

4,547

 

Other, net

 

 

169

 

 

 

19

 

 

 

172

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

85,767

 

 

 

82,308

 

 

 

85,767

 

 

 

82,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

75,045

 

 

 

44,973

 

 

 

57,055

 

 

 

34,566

 

Net income

 

 

16,728

 

 

 

15,457

 

 

 

55,998

 

 

 

44,813

 

Common stock cash dividends

 

 

(4,634

)

 

 

(4,214

)

 

 

(13,931

)

 

 

(12,665

)

Common stock repurchased

 

 

(7,506

)

 

 

(5,481

)

 

 

(19,489

)

 

 

(15,947

)

Cumulative effect of accounting changes

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

79,633

 

 

 

50,735

 

 

 

79,633

 

 

 

50,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

437

 

 

 

3,367

 

 

 

1,822

 

 

 

3,186

 

Other comprehensive loss

 

 

(2,913

)

 

 

(1,905

)

 

 

(4,298

)

 

 

(1,734

)

Cumulative effect of accounting changes

 

 

0

 

 

 

0

 

 

 

0

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

(2,476

)

 

 

1,462

 

 

 

(2,476

)

 

 

1,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

162,924

 

 

$

134,505

 

 

$

162,924

 

 

$

134,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.62

 

 

$

0.56

 

 

$

1.86

 

 

$

1.68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

7


PART I

Item 1

 

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Microsoft Corporation fiscal year 2021 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on July 29, 2021.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.

Financial Instruments

Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

8


PART I

Item 1

 

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.

Derivatives

Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

Fair Value Measurements

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

 

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain over-the-counter forward, option, and swap contracts.

 

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Contract Balances and Other Receivables

As of March 31, 2022 and June 30, 2021, other receivables due from suppliers were $1.0 billion and $ 965 million, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

9


PART I

Item 1

 

As of March 31, 2022 and June 30, 2021, long-term accounts receivable, net of allowance for doubtful accounts, was $3.6 billion and $3.4 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of March 31, 2022 and June 30, 2021, our financing receivables, net were $2.4 billion and $ 4.4 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

Recent Accounting Guidance

Accounting for Income Taxes

In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. We adopted the standard effective July 1, 2021. Adoption of the standard did not have a material impact on our consolidated financial statements.

NOTE 2 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

The components of basic and diluted EPS were as follows:

 

(In millions, except earnings per share)

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders (A)

 

$

  16,728

 

 

$

15,457

 

 

$

55,998

 

 

$

  44,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock (B)

 

 

7,493

 

 

 

7,539

 

 

 

7,504

 

 

 

7,554

 

Dilutive effect of stock-based awards

 

 

41

 

 

 

58

 

 

 

48

 

 

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents (C)

 

 

7,534

 

 

 

7,597

 

 

 

7,552

 

 

 

  7,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

2.23

 

 

$

2.05

 

 

$

7.46

 

 

$

5.93

 

Diluted (A/C)

 

$

2.22

 

 

$

2.03

 

 

$

7.41

 

 

$

5.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

 

10


PART I

Item 1

 

 

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

 

(In millions)

 

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividends income

 

$

519

 

 

$

519

 

 

$

1,542

 

 

$

1,634

 

Interest expense

 

 

(503

)

 

 

(633

)

 

 

(1,567

)

 

 

(1,793

)

Net recognized gains (losses) on investments

 

 

(76

)

 

 

353

 

 

 

595

 

 

 

837

 

Net losses on derivatives

 

 

(29

)

 

 

(2

)

 

 

(29

)

 

 

(4

)

Net gains (losses) on foreign currency remeasurements

 

 

(74

)

 

 

(55

)

 

 

(152

)

 

 

126

 

Other, net

 

 

(11

)

 

 

6

 

 

 

(9

)

 

 

76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(174

)

 

$

188

 

 

$

380

 

 

$

876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

 

(In millions)

 

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains from sales of available-for-sale securities

 

$

119

 

 

$

33

 

 

$

150

 

 

$

84

 

Realized losses from sales of available-for-sale securities

 

 

(89

)

 

 

(12

)

 

 

(102

)

 

 

(30

)

Impairments and allowance for credit losses

 

 

(45

)

 

 

(10

)

 

 

(53

)

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(15

)

 

$

11

 

 

$

(5

)

 

$

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net recognized gains (losses) on equity investments were as follows:

 

(In millions)

 

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses) on investments sold

 

$

(22

)

 

$

43

 

 

$

46

 

 

$

76

 

Net unrealized gains (losses) on investments still held

 

 

(34

)

 

 

299

 

 

 

559

 

 

 

725

 

Impairments of investments

 

 

(5

)

 

 

0

 

 

 

(5

)

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(61

)

 

$

342

 

 

$

600

 

 

$

790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


PART I

Item 1

 

 

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

 

(In millions)

 

Fair Value

Level

 

 

Adjusted

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Recorded

Basis

 

 

Cash

 and Cash

Equivalents

 

 

Short-term

Investments

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

 

$

883

 

 

$

0

 

 

$

0

 

 

$

883

 

 

$

802

 

 

$

81

 

 

$

0

 

Certificates of deposit

 

Level 2

 

 

 

3,045

 

 

 

0

 

 

 

0

 

 

 

3,045

 

 

 

3,003

 

 

 

42

 

 

 

0

 

U.S. government securities

 

Level 1

 

 

 

79,211

 

 

 

347

 

 

 

(1,174

)

 

 

78,384

 

 

 

3

 

 

 

78,381

 

 

 

0

 

U.S. agency securities

 

Level 2

 

 

 

417

 

 

 

0

 

 

 

(6

)

 

 

411

 

 

 

0

 

 

 

411

 

 

 

0

 

Foreign government bonds

 

Level 2

 

 

 

508

 

 

 

3

 

 

 

(10

)

 

 

501

 

 

 

0

 

 

 

501

 

 

 

0

 

Mortgage- and asset-backed securities

 

Level 2

 

 

 

602

 

 

 

2

 

 

 

(14

)

 

 

590

 

 

 

0

 

 

 

590

 

 

 

0

 

Corporate notes and bonds

 

Level 2

 

 

 

11,910

 

 

 

31

 

 

 

(277

)

 

 

11,664

 

 

 

0

 

 

 

11,664

 

 

 

0

 

Corporate notes and bonds

 

Level 3

 

 

 

45

 

 

 

0

 

 

 

0

 

 

 

45

 

 

 

0

 

 

 

45

 

 

 

0

 

Municipal securities

 

Level 2

 

 

 

324

 

 

 

34

 

 

 

(7

)

 

 

351

 

 

 

0

 

 

 

351

 

 

 

0

 

Municipal securities

 

Level 3

 

 

 

103

 

 

 

0

 

 

 

(7

)

 

 

96

 

 

 

0

 

 

 

96

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

$

97,048

 

 

$

417

 

 

$

(1,495

)

 

$

95,970

 

 

$

3,808

 

 

$

92,162

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,857

 

 

$

1,234

 

 

$

0

 

 

$

623

 

Equity investments

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,284

 

 

 

0

 

 

 

0

 

 

 

6,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,141

 

 

$

1,234

 

 

$

0

 

 

$

6,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,456

 

 

$

7,456

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33

 

 

 

0

 

 

 

33

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

111,600

 

 

$

12,498

 

 

$

92,195

 

 

$

6,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12


PART I

Item 1

 

 

 

(In millions)

 

Fair Value

Level

 

 

Adjusted

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Recorded

Basis

 

 

Cash

and Cash

Equivalents

 

 

Short-term

Investments

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

 

$

4,316

 

 

$

0

 

 

$

0

 

 

$

4,316

 

 

$

1,331

 

 

$

2,985

 

 

$

0

 

Certificates of deposit

 

Level 2

 

 

 

3,615

 

 

 

0

 

 

 

0

 

 

 

3,615

 

 

 

2,920

 

 

 

695

 

 

 

0

 

U.S. government securities

 

Level 1

 

 

 

90,664

 

 

 

3,832

 

 

 

(111

)

 

 

94,385

 

 

 

1,500

 

 

 

92,885

 

 

 

0

 

U.S. agency securities

 

Level 2

 

 

 

807

 

 

 

2

 

 

 

0

 

 

 

809

 

 

 

0

 

 

 

809

 

 

 

0

 

Foreign government bonds

 

Level 2

 

 

 

6,213

 

 

 

9

 

 

 

(2

)

 

 

6,220

 

 

 

225

 

 

 

5,995

 

 

 

0

 

Mortgage- and asset-backed securities

 

Level 2

 

 

 

3,442

 

 

 

22

 

 

 

(6

)

 

 

3,458

 

 

 

0

 

 

 

3,458

 

 

 

0

 

Corporate notes and bonds

 

Level 2

 

 

 

8,443

 

 

 

249

 

 

 

(9

)

 

 

8,683

 

 

 

0

 

 

 

8,683

 

 

 

0

 

Corporate notes and bonds

 

Level 3

 

 

 

63

 

 

 

0

 

 

 

0

 

 

 

63

 

 

 

0

 

 

 

63

 

 

 

0

 

Municipal securities

 

Level 2

 

 

 

308

 

 

 

63

 

 

 

0

 

 

 

371

 

 

 

0

 

 

 

371

 

 

 

0

 

Municipal securities

 

Level 3

 

 

 

95

 

 

 

0

 

 

 

(7

)

 

 

88

 

 

 

0

 

 

 

88

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

$

117,966

 

 

$

4,177

 

 

$

(135

)

 

$

122,008

 

 

$

5,976

 

 

$

116,032

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,582

 

 

$

976

 

 

$

0

 

 

$

606

 

Equity investments

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,378

 

 

 

0

 

 

 

0

 

 

 

5,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,960

 

 

$

976

 

 

$

0

 

 

$

5,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,272

 

 

$

7,272

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78

 

 

 

0

 

 

 

78

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

136,318

 

 

$

14,224

 

 

$

116,110

 

 

$

5,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of March 31, 2022 and June 30, 2021, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $3.8 billion and $ 3.3 billion, respectively.

Unrealized Losses on Debt Investments

 

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

 

 

 

 

 

Total
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

Fair Value

 

 

 

Unrealized
Losses

 

 

 

Fair Value

 

 

 

Unrealized
Losses

 

 

 

Total
Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

35,798

 

 

$

(918

)

 

$

2,308

 

 

$

(262

)

 

$

38,106

 

 

$

(1,180

)

Foreign government bonds

 

 

419

 

 

 

(6

)

 

 

30

 

 

 

(4

)

 

 

449

 

 

 

(10

)

Mortgage- and asset-backed securities

 

 

450

 

 

 

(13

)

 

 

33

 

 

 

(1

)

 

 

483

 

 

 

(14

)

Corporate notes and bonds

 

 

8,133

 

 

 

(241

)

 

 

461

 

 

 

(36

)

 

 

8,594

 

 

 

(277

)

Municipal securities

 

 

125

 

 

 

(7

)

 

 

57

 

 

 

(7

)

 

 

182

 

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

44,925

 

 

$

(1,185

)

 

$

2,889

 

 

$

(310

)

 

$

47,814

 

 

$

(1,495

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13


PART I

Item 1

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

 

 

 

 

 

Total
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

Fair Value

 

 

 

Unrealized
Losses

 

 

 

Fair Value

 

 

 

Unrealized
Losses

 

 

 

Total
Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

5,294

 

 

$

(111

)

 

$

0

 

 

$

0

 

 

$

5,294

 

 

$

(111

)

Foreign government bonds

 

 

3,148

 

 

 

(1

)

 

 

5

 

 

 

(1

)

 

 

3,153

 

 

 

(2

)

Mortgage- and asset-backed securities

 

 

1,211

 

 

 

(5

)

 

 

87

 

 

 

(1

)

 

 

1,298

 

 

 

(6

)

Corporate notes and bonds

 

 

1,678

 

 

 

(8

)

 

 

34

 

 

 

(1

)

 

 

1,712

 

 

 

(9

)

Municipal securities

 

 

58

 

 

 

(7

)

 

 

1

 

 

 

0

 

 

 

59

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

11,389

 

 

$

(132

)

 

$

127

 

 

$

(3

)

 

$

11,516

 

 

$

(135

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.

Debt Investment Maturities

 

(In millions)

 

Adjusted

Cost Basis

 

 

Estimated

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

20,401

 

 

$

20,496

 

Due after one year through five years

 

 

56,463

 

 

 

56,076

 

Due after five years through 10 years

 

 

18,807

 

 

 

18,049

 

Due after 10 years

 

 

1,377

 

 

 

1,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

97,048

 

 

$

95,970

 

 

 

 

 

 

 

 

 

 

 

NOTE 5 — DERIVATIVES

We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.

Foreign Currencies

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.

Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.

Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.

Interest Rate

Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.

14


PART I

Item 1

 

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Equity

Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Credit

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of March 31, 2022, our long-term unsecured debt rating was AAA , and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

 

(In millions)

 

March 31,

2022

 

 

June 30,

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts purchased

 

$

635

 

 

$

635

 

Foreign exchange contracts sold

 

 

0

 

 

 

6,081

 

Interest rate contracts purchased

 

 

1,160

 

 

 

1,247

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts purchased

 

 

8,151

 

 

 

14,223

 

Foreign exchange contracts sold

 

 

13,929

 

 

 

23,391

 

Other contracts purchased

 

 

2,757

 

 

 

2,456

 

Other contracts sold

 

 

869

 

 

 

763

 

 

 

 

 

 

 

 

 

 

 

15


PART I

Item 1

 

 

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

 

 

 

Derivative

 

 

 

Derivative

 

 

Derivative

 

 

Derivative

 

(In millions)

 

Assets

 

 

 

Liabilities

 

 

Assets

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

2022

 

 

June 30,

2021

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

0

 

 

$

(39

)

 

$

76

 

 

$

(8

)

Interest rate contracts

 

 

0

 

 

 

(43

)

 

 

40

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

234

 

 

 

(322

)

 

 

227

 

 

 

(291

)

Other contracts

 

 

96

 

 

 

(25

)

 

 

56

 

 

 

(36

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross amounts of derivatives

 

 

330

 

 

 

(429

)

 

 

399

 

 

 

(335

)

Gross amounts of derivatives offset in the balance sheet

 

 

(175

)

 

 

177

 

 

 

(141

)

 

 

142

 

Cash collateral received

 

 

0

 

 

 

(175

)

 

 

0

 

 

 

(42

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amounts of derivatives

 

$

155

 

 

$

(427

)

 

$

258

 

 

$

(235

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

33

 

 

$

0

 

 

$

78

 

 

$

0

 

Other current assets

 

 

167

 

 

 

0

 

 

 

137

 

 

 

0

 

Other long-term assets

 

 

(45

)

 

 

0

 

 

 

43

 

 

 

0

 

Other current liabilities

 

 

0

 

 

 

(311

)

 

 

0

 

 

 

(182

)

Other long-term liabilities

 

 

0

 

 

 

(116

)

 

 

0

 

 

 

(53

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

155

 

 

$

(427

)

 

$

258

 

 

$

(235

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $314 million and $426 million, respectively, as of March 31, 2022, and $395 million and $ 335 million, respectively, as of June 30, 2021. 

The following table presents the fair value of our derivatives instruments on a gross basis:

 

(In millions)

 

Level 1

 

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

0

 

 

$

314

 

 

$

16

 

 

$

330

 

Derivative liabilities

 

 

0

 

 

 

(429

)

 

 

0

 

 

 

(429

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

0

 

 

 

396

 

 

 

3

 

 

 

399

 

Derivative liabilities

 

 

0

 

 

 

(335

)

 

 

0

 

 

 

(335

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16


PART I

Item 1

 

 

Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:

 

(In millions)

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Fair Value Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

0

 

 

$

482

 

 

$

49

 

 

$

189

 

Hedged items

 

 

0

 

 

 

(474

)

 

 

(50

)

 

 

(181

)

Excluded from effectiveness assessment

 

 

0

 

 

 

7

 

 

 

4

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

(57

)

 

 

(41

)

 

 

(71

)

 

 

(50

)

Hedged items

 

 

61

 

 

 

46

 

 

 

83

 

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Cash Flow Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount reclassified from accumulated other comprehensive income

 

 

(15

)

 

 

(26

)

 

 

(44

)

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

35

 

 

 

(130

)

 

 

308

 

 

 

67

 

Other contracts

 

 

(29

)

 

 

(17

)

 

 

(41

)

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

 

(In millions)

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Cash Flow Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in effectiveness assessment

 

$

(6

)

 

$

(2

)

 

$

(27

)

 

$

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 6  INVENTORIES

The components of inventories were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

2022

 

 

June 30,

2021

 

 

 

 

Raw materials

 

$

1,369

 

 

$

1,190

 

Work in process

 

 

87

 

 

 

79

 

Finished goods

 

 

1,840

 

 

 

1,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,296

 

 

$

2,636

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 7 — BUSINESS COMBINATIONS

Nuance Communications, Inc.

On March 4, 2022, we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase price of $18.8 billion, consisting primarily of cash. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The financial results of Nuance have been included in our consolidated financial statements since the date of the acquisition. Nuance is reported as part of our Intelligent Cloud segment.

17


PART I

Item 1

 

The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:

 

(In millions) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill (a)

 

 

16,295

 

Intangible assets

 

 

 

4,340

 

Other assets

 

 

 

29

 

Other liabilities (b)

 

 

 

(1,897

)

 

 

 

 

 

 

 

 

 

 

 

 

Total 

 

 

$

18,767

 

 

 

 

 

 

 

 

 

 

 

(a)

Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes.

(b)

Includes $986 million of convertible senior notes issued by Nuance in 2015 and 2017, of which $947 million was redeemed prior to March 31, 2022. The remaining $39 million of notes are redeemable through their respective maturity dates and are included in other current liabilities on our consolidated balance sheets as of March 31, 2022.

 

Following are the details of the purchase price allocated to the intangible assets acquired:

 

(In millions, except average life)

 

Amount

 

 

Weighted

Average Life

 

 

 

 

 

 

 

Customer-related

 

$

2,560

 

 

9 years

 

Technology-based

 

 

1,560

 

 

4 years

 

Marketing-related

 

 

220

 

 

4 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,340

 

 

7 years

 

 

 

 

 

 

 

 

 

 

ZeniMax Media Inc.

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC (“Bethesda”), for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $766 million of cash and cash equivalents acquired. Bethesda is one of the largest, privately held game developers and publishers in the world, and brings a broad portfolio of games, technology, and talent to Xbox. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment.

The allocation of the purchase price to goodwill was completed as of December 31, 2021. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

 

(In millions) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

766

 

Goodwill

 

 

 

5,510

 

Intangible assets

 

 

 

1,968

 

Other assets

 

 

 

121

 

Other liabilities

 

 

 

(244

)

 

 

 

 

 

 

 

 

 

 

 

 

Total 

 

 

$

8,121

 

 

 

 

  

  

 

 

Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.

18


PART I

Item 1

 

Following are details of the purchase price allocated to the intangible assets acquired:

 

(In millions, except average life)

 

Amount

 

Weighted

Average Life

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology-based

 

$

1,341

 

 

 4 years

 

Marketing-related

 

 

627

 

 

11 years

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,968

 

 

6 years

 

 

 

 

 

 

 

 

 

 

Activision Blizzard, Inc.

On January 18, 2022, we entered into a definitive agreement to acquire Activision Blizzard, Inc. (“Activision Blizzard”) for $95.00 per share in an all-cash transaction valued at $68.7 billion, inclusive of Activision Blizzard’s net cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud and will provide building blocks for the metaverse. We expect this acquisition to close in fiscal year 2023, subject to approval by Activision Blizzard’s shareholders, the satisfaction of certain regulatory approvals, and other customary closing conditions.

NOTE 8 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

 

(In millions)

 

June 30,

2021

 

 

Acquisitions

 

 

Other

 

 

March 31,

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

24,317

 

 

$

599

 

 

$

(9

)

 

$

24,907

 

Intelligent Cloud

 

 

13,256

 

 

 

16,879

 (a)

 

 

83

 

 

 

30,218

 

More Personal Computing

 

 

12,138

 

 

 

224

 

 

 

(116

)

 

 

12,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

49,711

 

 

$

17,702

 

 

$

(42

)

 

$

67,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes goodwill of $16.3 billion related to Nuance. See Note 7 – Business Combinations for further information .

 

The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.

 

19


PART I

Item 1

 

 

NOTE 9  INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

 

(In millions)

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net

Carrying

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

2022

 

 

June 30,

2021

 

 

 

 

 

 

 

 

Technology-based

 

$

11,570

 

 

$

(7,346

)

 

$

4,224

 

 

$

9,779

 

 

$

(7,007

)

 

$

2,772

 

Customer-related

 

 

7,578

 

 

 

(3,366

)

 

 

4,212

 

 

 

4,958

 

 

 

(2,859

)

 

 

2,099

 

Marketing-related

 

 

5,033

 

 

 

(2,131

)

 

 

2,902

 

 

 

4,792

 

 

 

(1,878

)

 

 

2,914

 

Contract-based

 

 

343

 

 

 

(333

)

 

 

10

 

 

 

446

 

 

 

(431

)

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

24,524

(a)

 

$

(13,176

)

 

$

11,348

 

 

$

19,975

 

 

$

(12,175

)

 

$

7,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes intangible assets of $4.3 billion related to Nuance. See Note 7 – Business Combinations for further information.

Intangible assets amortization expense was $502 million and $1.4 billion for the three and nine months ended March 31, 2022, respectively, and $405 million and $ 1.2 billion for the three and nine months ended March 31, 2021, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of March 31, 2022:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

2022 (excluding the nine months ended March 31, 2022)

 

$

618

 

2023

 

 

2,579

 

2024

 

 

2,275

 

2025

 

 

1,551

 

2026

 

 

1,110

 

Thereafter

 

 

3,215

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

11,348

 

 

 

 

 

 

 

20


PART I

Item 1

 

 

NOTE 10  DEBT

The components of debt were as follows:

 

(In millions, issuance by calendar year)

 

Maturities

(calendar year)

 

Stated Interest

Rate

 

 

Effective Interest

Rate

 

 

March 31,

2022

 

 

June 30,

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 issuance of $3.8 billion (a)

 

 

 

 

2039

 

 

 

 

5.20%

 

 

 

 

5.24%

 

 

$

520

 

 

$

520

 

2010 issuance of $4.8 billion (a)

 

 

 

 

2040

 

 

 

 

4.50%

 

 

 

 

4.57%

 

 

 

486

 

 

 

486

 

2011 issuance of $2.3 billion (a)

 

 

 

 

2041

 

 

 

 

5.30%

 

 

 

 

5.36%

 

 

 

718

 

 

 

718

 

2012 issuance of $2.3 billion (a)

 

 

2022

2042

 

 

2.13%

3.50%

 

 

2.24%

3.57%

 

 

 

1,204

 

 

 

1,204

 

2013 issuance of $5.2 billion (a)

 

 

2023

2043

 

 

2.38%

4.88%

 

 

2.47%

4.92%

 

 

 

2,814

 

 

 

2,814

 

2013 issuance of €4.1 billion

 

 

2028

2033

 

 

2.63%

3.13%

 

 

2.69%

3.22%

 

 

 

2,559

 

 

 

4,803

 

2015 issuance of $23.8 billion (a)

 

 

2022

2055

 

 

2.65%

4.75%

 

 

2.72%

4.78%

 

 

 

10,805

 

 

 

12,305

 

2016 issuance of $19.8 billion (a)

 

 

2023

2056

 

 

2.00%

3.95%

 

 

2.10%

4.03%

 

 

 

9,430

 

 

 

12,180

 

2017 issuance of $17.0 billion (a)

 

 

2024

2057

 

 

2.88%

4.50%

 

 

3.04%

4.53%

 

 

 

8,945

 

 

 

10,695

 

2020 issuance of $10.0 billion (a)

 

 

2050

2060

 

 

2.53%

2.68%

 

 

2.53%

2.68%

 

 

 

10,000

 

 

 

10,000

 

2021 issuance of $8.2 billion (a)

 

 

2052

2062

 

 

2.92%

3.04%

 

 

2.92%

3.04%

 

 

 

8,185

 

 

 

8,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total face value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55,666

 

 

 

63,910

 

Unamortized discount and issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(481

)

 

 

(511

)

Hedge fair value adjustments (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43

)

 

 

40

 

Premium on debt exchange (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,216

)

 

 

(5,293

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,926

 

 

 

58,146

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,749

)

 

 

(8,072

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

48,177

 

 

$

50,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

In March 2021 and June 2020, we exchanged a portion of our existing debt at a premium for cash and new debt with longer maturities. The premiums are amortized over the terms of the new debt.

(b)

Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of March 31, 2022 and June 30, 2021, the estimated fair value of long-term debt, including the current portion, was $55.9 billion and $ 70.0 billion, respectively. The estimated fair values are based on Level 2 inputs.

Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually.

The following table outlines maturities of our long-term debt, including the current portion, as of March 31, 2022:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

 

 

 

2022 (excluding the nine months ended March 31, 2022)

 

$

0

 

2023

 

 

2,750

 

2024

 

 

5,250

 

2025

 

 

2,250

 

2026

 

 

3,000

 

Thereafter

 

 

42,416

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

55,666

 

 

 

 

 

 

 

21


PART I

Item 1

 

 

NOTE 11  INCOME TAXES

Effective Tax Rate

Our effective tax rate was 17% and 10% for the three months ended March 31, 2022 and 2021, respectively, and 11% and 13% for the nine months ended March 31, 2022 and 2021, respectively. The increase in our effective tax rate for the three months ended March 31, 2022 compared to the prior year was primarily due to tax benefits from a decision by the India Supreme Court on withholding taxes in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax and an agreement between the U.S. and India tax authorities related to transfer pricing in fiscal year 2021, a decrease in tax benefits relating to stock-based compensation, and changes in the mix of our income before income taxes between the U.S. and foreign countries. The decrease in our effective tax rate for the nine months ended March 31, 2022 compared to the prior year was primarily due to a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties, offset in part by tax benefits from the India Supreme Court decision on withholding taxes and an agreement between the U.S. and India tax authorities related to transfer pricing in fiscal year 2021, and changes in the mix of our income before income taxes between the U.S. and foreign countries.

We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016 .

In the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022, as the value of future U.S. tax deductions exceeds the current tax liability from the U.S. global intangible low-taxed income tax.

Our effective tax rate was lower than the U.S. federal statutory rate for the three and nine months ended March 31, 2022, primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland, tax benefits relating to stock-based compensation, and for the nine months ended March 31, 2022, the net income tax benefit related to the transfer of intangible properties.

Uncertain Tax Positions

As of March 31, 2022 and June 30, 2021, unrecognized tax benefits and other income tax liabilities were $ 16.7 billion and $15.9 billion, respectively, and are included in long-term income taxes in our consolidated balance sheets.

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. In the second quarter of fiscal year 2021, we settled an additional portion of the IRS audits for tax years 2004 to 2013 and made a payment of $1.7 billion, including tax and interest. We remain under audit for tax years 2004 to 2017.

As of March 31, 2022, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2021, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements. 

22


PART I

Item 1

 

NOTE 12 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

2022

 

 

June 30,
2021

 

 

 

 

Productivity and Business Processes

 

$

18,578

 

 

$

22,120

 

Intelligent Cloud

 

 

14,524

 

 

 

17,710

 

More Personal Computing

 

 

3,694

 

 

 

4,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

36,796

 

 

$

44,141

 

 

 

 

 

 

 

 

 

 

 

Changes in unearned revenue were as follows:

 

(In millions)

 

 

 

 

 

 

 

Nine Months Ended March 31, 2022

 

 

 

Balance, beginning of period

 

$

44,141

 

Deferral of revenue

 

 

70,939

 

Recognition of unearned revenue

 

 

(78,284

)

 

 

 

 

 

 

 

Balance, end of period

 

$

36,796

 

 

 

 

 

 

 

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $160 billion as of March 31, 2022, of which $155 billion is related to the commercial portion of revenue. We expect to recognize approximately 50% of this revenue over the next 12 months and the remainder thereafter.

 

 

NOTE 13  LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of 1 year to 19 years, some of which include options to extend the leases for up to 5 years , and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

 

(In millions)

 

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended 

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

744

 

 

$

553

 

 

$

1,801

 

 

$

1,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

289

 

 

$

211

 

 

$

779

 

 

$

666

 

Interest on lease liabilities

 

 

109

 

 

 

100

 

 

 

320

 

 

 

286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease cost

 

$

398

 

 

$

311

 

 

$

1,099

 

 

$

952

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23


PART I

Item 1

 

 

Supplemental cash flow information related to leases was as follows:

 

(In millions)

 

Three Months Ended

March 31,

 

 

 

Nine Months Ended

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

 

2021

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

726

 

 

$

533

 

 

$

1,733

 

 

$

1,506

 

Operating cash flows from finance leases

 

 

109

 

 

 

100

 

 

 

320

 

 

 

286

 

Financing cash flows from finance leases